On Tuesday, Barclays made a notable change in its assessment of TGS NOPEC Geophysical Co ASA (TGS:NO) (OTC: TGSNF), upgrading the stock from Equalweight to Overweight and increasing the price target to NOK245.00, a significant rise from the previous NOK185.00. The decision comes in anticipation of a merger between TGS and PGS, which is expected to be reflected in the company’s financial model starting from the third quarter.
The analyst from Barclays highlighted the strong free cash flow (FCF) generation projected for the combined entity, with expectations that by the end of 2025, the net debt of the merged company would be nearly eliminated.
The new company is estimated to have an FCF yield of approximately 21% in 2025, which is a considerable increase compared to TGS’s three-year average of 8% and PGS’s 11%.
The upgraded price target is based on a discounted cash flow (DCF) method, utilizing a discount rate of 12.5%. This rate is a median of the rates previously applied to PGS and TGS and is higher than the 10% used for other companies in the sector. The analyst justified the higher discount rate by citing the potentially variable nature of multi-client earnings.
According to the Barclays analyst, even at the new target price of NOK245.00 per share, the FCF yield for 2025 would remain at 11%, suggesting that there could be further upside potential for the stock if the merged company meets its financial targets. With the new price target representing about a 90% upside potential, the upgrade to Overweight reflects the firm’s optimism about the stock’s future performance.
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